Sentiment Risk Premia in the Cross-Section of Global Equity

71 Pages Posted: 28 May 2020 Last revised: 2 Oct 2020

See all articles by Roland Füss

Roland Füss

University of St. Gallen - School of Finance

Massimo Guidolin

Bocconi University - Department of Finance

Christian Koeppel

University of St. Gallen

Date Written: September 30, 2020

Abstract

This paper introduces a new sentiment-augmented asset pricing model and provides a com-
prehensive understanding of the role of this sentiment-driven risk factors. We find that news and
social media search-based indicators are significantly related to excess returns of international
equity indices. Adding sentiment factors to both classical and more recent pricing models leads
to a significant increase in model performance. When it is estimated using the Fama-MacBeth
procedure, our modified pricing model implies positive estimates of the risk premium for pos-
itive sentiment and negative premia estimates for the negative sentiment factor. Our results
contribute to the explanation of global cross-sectional average excess returns and are robust to
augmenting the model with fundamental factors, momentum, idiosyncratic volatility, skewness,
kurtosis, and the returns on international currencies. When compared to competing definitions
of sentiment factors already popular in the literature, our new sentiment risk indicator turns
out to be superior in terms of out-of-sample predictive power.

Keywords: Asset pricing, behavioral finance, financial markets, investor sentiment, sentiment risk premium

JEL Classification: C53, G12, G41

Suggested Citation

Füss, Roland and Guidolin, Massimo and Koeppel, Christian, Sentiment Risk Premia in the Cross-Section of Global Equity (September 30, 2020). University of St.Gallen, School of Finance Research Paper No. 2019/13, Available at SSRN: https://ssrn.com/abstract=3612778 or http://dx.doi.org/10.2139/ssrn.3612778

Roland Füss (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland
+41 (0)71 224 70 42 (Phone)
+41 (0)71 224 70 88 (Fax)

HOME PAGE: http://www.sbf.unisg.ch/en/Lehrstuehle/Lehrstuhl_Fuess.aspx

Massimo Guidolin

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Christian Koeppel

University of St. Gallen ( email )

Langgasse 1
St. Gallen, 9008
Switzerland

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
447
Abstract Views
2,262
rank
71,751
PlumX Metrics